New Netflix Pricing Gets Thumbs Down

Stock Falls 19% As Customers Leave

On Thursday, Netflix cut its quarterly subscriber forecast, leading those already skeptical about the company to say its momentum has faltered. Rex Crum has details on digits.

On Thursday, the company said it now expects to lose about 1 million customers because of a pricing plan change which raised rates for subscribers to one of its most popular offerings. Its shares fell 19%.

The company now expects to have 24 million domestic subscribers at the end of the third quarter, below its earlier expectation of 25 million and the 24.6 million U.S. customers it had at the end of the second quarter.

This is the second setback in the past month for Netflix. On Sept. 1, Starz Entertainment LLC—a key content partner—said it had ended contract negotiations with Netflix because the two sides couldn't agree on pricing and packaging. The setbacks come as companies including
Amazon.com Inc.
AMZN 0.14%
and
Apple Inc.
AAPL -0.10%
have ramped up their video-by-internet offerings, putting pressure on Netflix to offer the widest possible selection of movies and TV shows.

WSJ's Martin Peers discusses how Netflix's change in its pricing structure this past summer is resulting in one million customers to turn off their subscriptions.

Over the summer, Netflix unbundled its popular $9.99 plan that allowed customers to get DVDs in the mail as well as stream video over the Internet. Under the new plan, which kicked in this month, Netflix charges $7.99 a month for each of those services.

More

On Thursday, Netflix acknowledged the anger but defended its decision. "We know our decision to split our services has upset many of our subscribers, which we don't take lightly, but we believe this split will help us make our services better for subscribers and shareholders for years to come," Netflix said.

The pricing changes mostly turned off DVD-only subscribers. Netflix said it now expects 800,000 fewer DVD-only subscribers. It expects 200,000 fewer streaming-only members than it previously forecast.

"Being able to precisely forecast and predict the behavior of that many people on a fairly radical change is something that we'll get better at all the time," said Ted Sarandos, Netflix's chief content officer, at a Paley Center event in Los Angeles.

Shares of Netflix sank fell 19% to $169.25, its lowest close since November. The stock is down 44% from its all-time high of $304.79 in July but remains up 18% over the past 12 months.

There were more woes for Netflix on Friday, as its shares fell another 5% and analysts continued to hammer on the drop management forecast in its U.S. subscriber base. Has Netflix lost critical momentum? Rex Crum reports on digits.

Netflix reaffirmed its estimate that 12 million users would remain on both plans, paying the higher subscription costs.

"Suddenly, the value proposition isn't that great. The consumer gets less for a higher price." "The Netflix model is a delicate balance between keeping the price right for the consumer and providing them enough content," Wedbush Securities analyst
Michael Pachter
said.

Despite the lowered subscriber forecast, Netflix backed its earnings and revenue targets for the quarter. Mr. Pachter said the company will likely feel the financial impact of the subscriber slowdown later in the year, noting that the price increase just took effect and the quarter ends Sept. 30. Helping the company's bottom line are the lower costs for streaming content as opposed to shipping DVDs, something Netflix has historically said it expects to benefit from as more of its customers shift to streaming plans and it no longer has to pay postage costs.

Netflix executives have said the increased investment in streaming content would lure more subscribers, in turn creating revenue to further build the library. But the recent setbacks have raised doubt about whether the company will see the "virtuous cycle" executives have described.

"Netflix has been a momentum story—you need more subs to buy more content, which allows you to get more subs," Janney Capital Markets analyst
Tony Wible
said. "Now you're starting that momentum in the other direction, where you have fewer subs, which could lead to lower content, to fewer subs."

There is also concern that content owners will raise their prices exponentially for streaming, whereas DVDs are rather set prices. That was what happened in Netflix's negotiations with Starz, which wanted 10 times its initial $30 million per year licensing contract, a person familiar with the matter earlier told the Wall Street Journal.

It is uncertain where Netflix's lost subscribers are going. While companies like Amazon, Apple and Hulu LLC have been beefing up their Internet video offerings, they either lack the scope Netflix has, or don't offer an all-you-can-eat subscription.

On Netflix's Facebook page, one customer said she had initially canceled her subscritpion in reaction to the price increase, but after trying other services, she decided to go back. "For the money, Netflix is the best for streaming," she said. Other Facebook posters said they would likely return to illegally downloading the shows from peer-to-peer file sharing networks.